With the Trump market leading to a new round of gains in the US stock market after the election, many institutions have recently raised their target levels for next year. Currently, Wall Street predicts that the median year-end point level of the S&P 500 index will be 6600 points, with more than 12% upside potential. However, the latest interest rate decision by the Federal Reserve has dealt a blow to investors, as expectations of a rate cut have been compressed, causing the three major US stock indexes to fall by over 2.5% on Wednesday. The market is beginning to reprice the interest rate path, and the uncertainty of monetary policy and macro prospects may bring more disturbances to the US stock market, which has been smooth sailing in recent years.
Monetary policy stance returns to caution
Regarding the decision of the Federal Reserve, Rick Rieder, Global Fixed Income Chief Investment Officer of BlackRock, said, "This is because the potential consequences of the incoming White House administration's policies could be very broad and unpredictable
Federal funds rate futures show that the Federal Reserve will pause interest rate cuts in January next year, with a full year rate cut of only 40 basis points, even lower than the FOMC's forecast.
Reed suggests that investors should be more cautious about next year's interest rates, as the long-term interest rates in the bond market may rise due to any potential 'short-term inflationary impact'.
Affected by changes in monetary policy expectations, US bond yields have significantly increased. The benchmark 10-year US Treasury yield once broke through the 4.50% mark during trading, reaching a new high since May this year. The CEO of Double Line Capital, known as the new bond king, said that the Federal Reserve will not have an aggressive interest rate cut cycle in the future.
I also support hawkish interest rate cuts, "Reed said. As Trump takes back the White House, the Federal Reserve is also assessing potential changes from trade dynamics to government spending, and the next White House policy will add new variables to the Fed's data-driven monetary decision-making approach. I think we will take 'data dependency' to a whole new level
On the other hand, Reid predicted that the "risk-free interest rate" in the bond market is more unstable than the corporate credit rate, because traders try to identify the future interest rate trend of the Federal Reserve, while worrying about the trajectory of inflation and the demand of the U.S. government to issue treasury bond bonds to cover its budget deficit.
Volatility risk or regression
Strong economic growth has been a key factor driving the continuous rise of the US stock market in the past two years. The Atlanta Fed's GDPNow model predicts that the US GDP growth rate in the fourth quarter of this year will be 3.2%.
Goldman Sachs Chief US Economist David Mericle predicts that the Federal Reserve will cut interest rates in March, June, and September next year, with the final rate of this round of rate cuts expected to be slightly higher at 3.50% -3.75%. Federal Reserve officials seem to be more open than we expected in rethinking neutral interest rates, indicating that they should start acting more cautiously as soon as possible when seeking the right stopping point, "he wrote.
David Kelly, chief global strategist of JPMorgan Asset Management, believes that recent data shows that economic growth is more flexible, inflation is more stubborn, and the stock market foam is bigger. The new government's policies may increase inflation pressure. He suggests that investors should ask themselves whether they are adequately prepared for potential fluctuations during periods of rising interest rates and conflicts between monetary and fiscal policies, given high valuations and market concentration.
Deutsche Bank predicts in its latest research report that the biggest bearish and volatility risks for the market next year will be global trade frictions, a sharp decline in the US technology industry, and concerns about inflation and bond yields.
Larry Adam, Chief Investment Officer of Raymond James, a brokerage firm, said, "The median target of 5000 (by 2024) is that most economists believe we will face an economic recession, which will bring downside risks to profit growth, but the actual situation is unexpected. As we enter next year, investors' optimism may also disappoint themselves in some way
Adam believes that investors should hold a cautious attitude towards these bullish forecasts, as the market's "excessive" optimism suggests that "moderate disappointment" may lead to stock market volatility. All the factors that could drive the market to achieve incredible sustainability by 2025 have been priced, with no bad news from Washington, no bad news from the economy, and no bad news from corporate profits
Melissa Brown, head of investment research at SimCorp, stated that Wall Street's "consensus estimate" for the stock market in 2025 is unlikely to be the final result for next year. She said, "Investors need to know how to position themselves based on their risk tolerance... In the past few years, we have seen volatility VIX unexpectedly low, but we will face even greater volatility in 2025. My suggestion is to diversify assets.
It is worth mentioning that last week, US President elect Trump rang the opening bell on the New York Stock Exchange and made a bold statement, "For me, the stock market is everything." Therefore, he may not allow the US stock market to experience a sharp decline, especially due to the turbulence caused by monetary policy. Although Trump has previously clarified rumors of replacing Powell, a new round of power struggle between the government and the Federal Reserve may begin with the latest interest rate decision.